The demand for forward contracts by arbitragers depends on the difference between:

Question

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Arbitragers profit from discrepancies between the interest parity forward rate (which is determined by the difference in interest rates between two currencies) and the actual forward rate quoted in the market. If these two rates differ, arbitrage opportunities arise, leading to a demand for forward contracts to exploit the difference for profit.

The Demand for Forward Contracts by Arbitragers Depends on the Difference